The demise of America is an often-told tale. When Bitcoin was closer to $60k, some keen observers claimed it reflected the decline of the dollar and the US economy. A popular meme is to compare America to the Roman Empire and its famous collapse. The American political scientist Graham Allison popularized the idea of a "Thucydides trap" where the world power (the US) is challenged by a rising power (China) and the tendency toward armed conflict.

Palak Patel, formerly a lead analyst at Fidelity for Latin America and South Asia, has contributed a thoughtful volume to this broad genre. His "The Tyranny of Nations," published in May, is a fascinating account that shows striking parallels between America today and the latter stages of the Dutch and British dominance. He has found a historical pattern and argues that another rendition is unfolding before us today.

America's financialization, the decline of manufacturing, and even the fracturing of the free-trade consensus fit the pattern. At the same time, Patel sees not only China but German and French tactics reminiscent of earlier epochs characterized by the competition among states. Parallels are drawn, and comparisons over time are easily made. For example, Patel offers two developmental strategies, cooperative and autarky. He locates China in the former camp and sees similarities with 17th-century France and 19th-century Prussia.

Both France and Prussia enjoyed a comparative advantage in labor and took advantage of outsourcing during the Dutch and British globalization drives. France established free trade zones and welcomed Dutch merchants to build textile manufacturing capacity and alcohol distilleries. Prussia was opened to investment from Britain, and even before it, to the early industrialized from Belgium and France, as China has done more recently with Japan and South Korea.

On the other hand, the Dutch Republic, Britain, and the US made significant strides in development through autarky. Each state was able to use a comparative advantage in labor when the global organization failed. Patel identifies the autarkic period in the US around the Civil War, as the Republicans raised tariffs to record levels and exploited the proximity to Caribbean nations. The British autarkic development corresponds to the period of the Old Colonial System that began with Cromwell's annexation of both Ireland and Jamaica. In the 15th and 16th centuries, the Dutch flirted with autarky to develop their shipbuilding capabilities.

While the historical examples are edifying, my real interest is the implication for the present and future. Looking ahead, Patel sees India, which is poised to be the fifth-largest economy in the world this year, to be in the autarky camp with its "Self-Reliant India" policies under Prime Minister Modi. Patel speculates that India may develop a comparative advantage in clean energy technology as the Dutch did with peat, the British with coal, and the US did with oil.

Patel's larger purpose is to show how far America and the world are into the third grand cycle of globalization that began with the rise of the free-trading States Party at the end of the Thirty Years War that spurred the Dutch-led attempt. He argues for dating the British-led globalization to the end of the Napoleonic Wars rather than with the establishment of the classic gold standard in 1873. Each era saw the prime state stabilize prices after a period of war-driven inflation. Long periods of price stability in the 17th and 19th centuries coincided with the internationalization of the domestic currency, imbuing the guilder and then sterling with exorbitant privilege. Moreover, interest rates on long-term government bonds trended lower alongside declining domestic capacity utilization rates. Thus, the Dutch Republic and British Empire had their versions of "secular stagnation."

Analogies are drawn between crises, the evolution of balance-of-payments, attitude toward free-trade, and many other events across the three super-cycles. The parallel experiences are points on the "life-cycle of nations, " Patel tells us. His is a tragic narrative. For the past 450 years, the global political economy has been in a loop. The set of policies that allow one nation to rise to prominence sets off a countermovement of those forces, both domestic and international, whose interests are not served.

In Patel's narrative, what the literature calls hegemonic stability is elusive and itself an ideological construct. The contradictions and fluidity of coalitions lead to instability. On the one hand, Patel takes the Minsky rule about periods of financial stability leading to instability and generalizes it for the political economy. On the other hand, he tracks the unresolved and unresolvable tension between centralization and what he calls polyarchy in an almost yin-and-yang dance, where one calls forth the other.

Patel offers a cyclical view of history that is not particularly optimistic about what lies ahead. Trade cooperation is diminishing, and a more assertive state will fill the vacuum, he warns. To be sure, Patel is dismissive of so-called laissez-faire eras in the first place. "What matters," Patel writes, "is how investor blocs chose to direct state intervention." Whether in the Dutch, British, or American incarnations, the state played a critical role in establishing and maintaining the market economy and free trade. Moreover, at this particular stage of the "life cycles" of nations, there is an elevated risk of war, which could be catastrophic given the levels of technological development.

To prevent a tragedy, Patel says that nations must "create peace preemptively. They must not only more strongly affirm comity as a global public good--a collective responsibility of all nations, not just one--but acknowledge that structural vulnerability that undermines it: the maldistribution of political and economic power, both within and between states." Which, of course, seems next to impossible.

Ancient Rome and Greece had cyclical views of history too. They were over-deterministic. Aristotle, for example, saw there were only three forms of government (rule by one, the few, or the many), and each decayed and led to the next. Patel does recognize some developments that have transcended the cycles. Power has become more diffused (polyarchy vs. centralization), and even if irregularly, individual rights have strengthened.

Still, drawing analogies with earlier periods can be instructive, even if not a cycle. The loose similarities are familiar to chess players. For example, one blocks a check rather than moving the king to allow castling later. Or there are a large number of openings (set moves to begin a match), and although they can be repeated over several games, it is hardly a cycle. Moreover, some defenses (set opening moves for the side that does not move first) work best against some openings. Still, the game is not cyclical One may trade two rooks for a queen in one match, and when faced with similar circumstances in another game, may make the same choice, but there is nothing cyclical about that. The game of chess is linear. There is a beginning (opening), middle game, and end game.

The sub-title of The Tyranny of Nations is "How the last 500 years shaped today's global economy." Yet, I am not sure how the choices made during the Dutch Republic or by England in the 1860s shape, circumscribe, or bear on Beijing or Washington's choices today. Faced with certain circumstances, occasionally similar policies are pursued. Still, there can be no doubt that Patel wants to more than echo Santayana that those who do not know history are destined to repeat it. Ultimately, Patel's fatalism is rooted in the instability generated by the existence of nation-states. However, the dynamism documented in some detail is predicated on power shifting among coalitions of interests. Thus, it may be less a tyranny of nations and more the fluidity of political arrangements that bedevils Patel.

In my work, Political Economy of Tomorrow, I see it a bit differently. The world ushered in at Bretton Woods toward the end of WWII laid in ruins by the late 1970s. A combination of economic stagnation and inflation tore the veneer off conventional wisdom and neo-classical economics. However, this did not mark the end of Pax Americana, as many foretold. And there is no reason why it did not end in Patel's narrative.

However, a new order (what I call a cash register) emerged--Reagan-Thatcher was a purposeful capital offensive. Organized labor was crushed. Capital was liberated from its moorings and limits to its mobility. The concentration of wealth and power increased dramatically. The General Agreement on Trade and Tariffs, the third leg of the institutional stool (alongside the IMF and World Bank), was recast as the World Trade Organization and helped combat the new forms of protectionism (voluntary export restrictions and orderly market agreements).

In effect, the US succeeded itself. The dollar is still the numeraire. Its banks and industry are still at what Lenin called the "commanding heights." China's population is roughly 4.25x larger than the US population. Perhaps by the end of this decade, China's GDP will be greater, but it is hardly in a position to supplant the US.

With an effort to introduce a minimum corporate tax and a somewhat more "polyarchal" sharing of tax revenues, a recognition of the pressing need to arrest climate change, and "Build Back Better World" to ostensibly offer an alternative to China's Belt Road Initiative, one can see the makings of a third American-led era. It will be partly but importantly defined as was the period after the Bretton Woods conference, in opposition to an authoritarian regime. There is also some suggestion that the Biden administration is considering spearheading a new generation of trade agreements that focus on digital commerce.

What Ian Bremmer has dubbed the "G-zero world" or what others have referred to as a hegemonic stability crisis does not wait for others to be ready to take the mantle. Europe's monetary union is incomplete, and its efforts for a fiscal union are stop-go at best and must be regarded as temporary until proven otherwise. It is rife with divisions between creditor and debtor and also between forms of liberalism. It is a prosperous area, but it cannot project its power and has been unable to keep Russia in check (see Georgia, Ukraine, and Crimea).

China is only gradually being integrated into the circuit of capital, and its clumsiness and aggressiveness in its own neighborhood leave it with few allies. Nearly five years after being included in the IMF's Special Drawing Rights (SDR), central banks have only allocated around 2% of their reserves to the yuan. The inclusion of yuan bonds into global benchmarks coupled with the rise of passive investing has seen portfolio capital flow to China. Still, foreign holdings account for around 10% of mainland bonds, a relatively low level compared with many other countries in the region. Most of China's trade is still invoiced in US dollars, and its share of SWIFT transactions remains de minimus at 1.5%-2.5% for the last five years. The low usage of the yuan is not a function of the PBOC's technology level, which means that a digital yuan is unlikely to be the game-changer some observers claim. The currency is still not convertible, and the yuan has no value outside of China.

Political Economy of Tomorrow suggests rather than an inescapable loop, history is the unfolding story of our interaction with nature and each other. It moves in the direction of conquering scarcity and increasing the number of people who can enjoy more leisure time--time not needed to secure the basket of goods and services of socially determined necessities. What we do in that leisure time will define us more than our work lives.

Patel is right. There are interesting and provocative parallels with the Dutch and British experience, but, in my reading, we have taken strides overcoming scarcity. This makes our evasion particularly acute: If scarcity has been overcome, how do free people act and organize themselves? Keynes dreamed that technological progress would allow his grandchildren to work as few as three hours a day. Are we not his grandchildren?

It is not inevitable that the US and China go to war. When everything was said in done, and the Bulletin of Atomic Scientists' doomsday clock moved toward midnight, the US and the Soviet Union did not go to war directly. Nuclear weapons have not been used in battle since the end of WWII. Looking at the strengths and weaknesses of the various key players, a new US-led order seems more likely than Sino Pax or an EU-led era. Patel's fascinating book offers a dark look at what the future can hold, but it is up to us to make sure it does not materialize.

Opinions expressed are solely of the author’s, based on current market conditions, and are subject to change without notice. These opinions are not intended to predict or guarantee the future performance of any currencies or markets. This material is for informational purposes only and should not be construed as research or as investment, legal or tax advice, nor should it be considered information sufficient upon which to base an investment decision. Further, this communication should not be deemed as a recommendation to invest or not to invest in any country or to undertake any specific position or transaction in any currency. There are risks associated with foreign currency investing, including but not limited to the use of leverage, which may accelerate the velocity of potential losses. Foreign currencies are subject to rapid price fluctuations due to adverse political, social and economic developments. These risks are greater for currencies in emerging markets than for those in more developed countries. Foreign currency transactions may not be suitable for all investors, depending on their financial sophistication and investment objectives. You should seek the services of an appropriate professional in connection with such matters. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete in its accuracy and cannot be guaranteed.

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